ECONOMICS: Free-market capitalism's champion dies

by John Ballantyne

News Weekly, December 9, 2006

Controversial Chicago University economist, Professor Milton Friedman, whose free-market ideology has had such a great impact on public policy around the world, has died aged 94, reports John Ballantyne.

Milton Friedman(July 31, 1912 - November 16, 2006)

Milton Friedman - famous populariser of free-market capitalism and winner of the 1976 Nobel Prize for economics - died on November 16, 2006, aged 94.

Long ridiculed for his unswerving belief in the benefits of deregulated capitalism, low taxation and limited government, he eventually saw his ideas gain respectability as they were adopted by governments across the free world, notably those of Britain's Margaret Thatcher and America's Ronald Reagan.

He even lived to see free-market economics become unquestioned orthodoxy in many former communist countries of Eastern Europe.

Born in 1912, in New York, to Jewish migrant parents from central Europe, Friedman knew financial hardship from an early age, but, overall, had a happy childhood. He won a competitive scholarship to Rutgers University, where he majored in mathematics and economics. He went on to do graduate work at Chicago University, the institution with which he would be associated for much of his life.

Think tanks

He became a formidable academic and brilliant debater. At various times, Friedman was president of the American Economic Association and the Mont Pelerin Society (which spawned numerous free-market think tanks around the world).

He started his career working for government in Washington during the time of the F.D. Roosevelt Administration.

The 1930s Great Depression saw joblessness in the U.S. and Australia soar to 30 per cent of the workforce (and also saw Hitler come to power in Germany). That crisis seemed to have discredited the notion that capitalism, left to itself, could deliver uninterrupted economic growth and provide jobs for all those willing and able to work.

Roosevelt tried to solve the crisis with public works programs and greater government regulation of the economy, but with very limited success.

At Cambridge, England, the famous 20th-century economist, John Maynard Keynes was working out how to overcome capitalism's boom-and-bust cycle and restore high and stable levels of output and employment. His proposed solution was for government to ensure a steadily growing level of total spending, even if this meant that government sometimes spent more than it received in tax revenue (an idea that had been frowned upon until that time).

After the war, Friedman would challenge the popular Keynesian view that capitalism needed heavy government regulation in order to function properly. He painstakingly studied the origins of the 1930s Great Depression as part of a book he co-authored with Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (1963). He concluded that the Depression was caused not by any inherent flaw in capitalism, but specifically by the perverse policies of America's central bank, the Federal Reserve, which contracted the money supply by a third between 1929 and 1933.

After the war, the opposite problem occurred as governments over-stimulated total spending in their bid to keep unemployment low and avoid a repetition of the 1930s. This led to a steadily increasing rate of inflation.

Unlike many conservative politicians, Friedman never blamed trade unions for inflation. Instead, he held government and central banks uniquely responsible for allowing total spending to outrun the economy's total output of goods and services. "Inflation," Friedman often used to say, "is always and everywhere a monetary phenomenon."

To ensure low inflation and economic stability, Friedman advocated depriving vote-hungry and profligate politicians of the power to print money. Instead, this power should be delegated to an independent monetary commission, free from day-to-day political interference. Its job would be to ensure a non-inflationary growth in the money supply, related to the underlying growth in the productive potential of the economy.

Technical monetary issues aside, Friedman was famous - some would say, notorious - for his advocacy of deregulated capitalism. In numerous popular books (many of which he co-wrote with his wife, Rose), such as Capitalism and Freedom (1962), Free to Choose (1980) and The Tyranny of the Status Quo (1984), he called for radically smaller government and lower taxes.

He looked back nostalgically to the pre-Depression era when total U.S. government spending (federal, state and local) was less than 10 per cent of the national income.

Friedman sought to replace all government social spending with a simple program of cash supplements for low-income earners. All other people would have to provide for themselves.

He advocated vouchers for schools, so that government money, instead of going to bureaucracies or school boards, would be given to parents who could then enrol their children in any school of their choice, government or independent.

Friedman's preferred model of deregulated capitalism - with no anti-trust laws or government intervention to tackle monopolies - is not without its critics. Many economists have argued that the increasing concentration of private ownership in areas such as banking and the media (and, in Australia, the retail sector, much of which is dominated by two supermarket chains) must be curbed in order to ensure genuine competition.